Department of Labor Changes Overtime Rules for Many Small Businesses

For several years, there has been no shortage of debate on ways to stimulate the U.S. economy as the recession of the late 2000s continues to impact millions of middle-class families. Some experts have suggested raising the minimum wage for workers, while others have pointed to certain industries that could grow and, in turn, spark the economy as a whole.

But now, the federal government has made a big change to how businesses must compensate their employees when working extra hours during the typical 40-hour workweek.

This week, the Department of Labor made a significant change to overtime rules for employers who have full-time workers on staff. The new law is expected to take hold in December.

Specifics of the New Overtime Rules

This change means that many more salaried W-2 employees who earn less than $47,476 annually will now be eligible to receive time-and-a-half payments for each overtime hour they work in a given workweek. These new overtime protections are designed to ensure that all employees within this income bracket are properly compensated – and that they actually are paid time-and-a-half based on their salaries for any overtime work they perform outside of their normal schedules.

These federal overtime rules had not been updated since 2004, which is likely a reason the government decided a revision to them was necessary after 12 years. Before that update, the previous one had come in 1975.

In terms of payroll, time-and-a-half is calculated by multiplying 1.5 times the equivalent hourly rate of a salaried worker after the employee logs more than 40 hours per week. As such, the new threshold for which employees will be eligible for overtime pay will nearly double when the law takes effect on December 1, 2016. The end result means that employers will have to track the hours of their salaried employees to be certain that each worker is being fairly compensated for his or her overtime work.

The current overtime rules state that any salaried employees who bring home over $23,660 each year and meet other requirements do not qualify to receive overtime pay.

How These Overtime Rules Affect Small Businesses

Once the calendar turns to December, employers will have a number of different options on how to tackle the forthcoming rules.
Some small business owners may change their pay structures of current salaried employees under the new threshold to hourly workers. Some may opt to give raises to employees near the threshold to avoid overtime compensation altogether. Others may reduce the base pay of employees who often work more than 40 hours, knowing that the overtime compensation will kick in for these employees at some point to make up for their difference in pay.
Other options may include having employers hire more part-time, entry-level, or 1099 independent contract workers to cover the potential overtime duties of full-time, W-2 employees.

Who Will Be Affected as an Employee?

According to estimates from the Department of Labor, roughly 4.2 million American workers will be impacted by the new rules in some way. However, the Economic Policy Institute claims that the new overtime threshold would benefit about 12.5 million additional employees in terms of receiving proper overtime pay.

Drawbacks to the New Overtime Rules

Opponents to the rules say that changes to the minimum wage must go through Congress, while this change is being directly implemented by the Obama administration. They say another drawback is that enacting such a rule nationwide does not make sense because income levels can vary greatly from one area to another. For instance, the median household income in Dayton, Ohio was $46,697 in 2014. In San Francisco, California, the number is more than double – $83,222 per household. (These are the latest statistics from the U.S. Census Bureau.)

The Bottom Line

Financially-strapped, overworked small business owners already have more than enough items on their daily to-do lists – and countless expenses in their budgets. These new overtime rules may simply be another task to add, especially when tracking employees’ hours that they did not have to track before.

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